Note from Daily Trade Alert: The goal of our High-Yield Trade of the Week column is to show you how to safely boost your income from some of the best stocks in the world. It’s our sincere hope that you benefit from this service.
Back in September, I introduced you to a high-yield trade with Kroger (KR) that was poised to deliver a 30.4% to 53.6% annualized yield.
If you made the trade, congratulations: the options contracts you sold likely expired worthless on October 20. You booked a 30.4% annualized yield so far and you still own the shares.
Today, with the stock trading above your purchase price, it’s time to generate even more income by selling another round of calls.
If you previously bought under $22 per share (which you should have), then consider selling the $22 strike price with an expiration date of December 15, 2017.
That will give you outsized income today, potentially set you up for a dividend payment, and still ensure a capital gain if shares get called away at expiration.
I just made this trade in my own retirement portfolio this morning. I sold to open four December 15, $22 call options on my 400 shares of KR at a limit price of $0.83 per share.
It’s poised to generate an annualized yield of 35.4% to 59.8%. I’ll share the details of this specific trade in tomorrow’s issue of Trades Of The Day.
For those who are looking to initiate a new high-yield trade with Kroger today, here’s what we’re looking at…
High-Yield Trade of the Week:
Sell the December 15, 2017, $22 call on shares of Kroger (KR)
As we go to press, KR is selling for $21.69 per share and the December 15 $22 calls are going for about $0.83 per share.
Our trade would involve buying 400 shares of KR and simultaneously selling four of those calls.
By selling call options, we would be giving the buyer of the option the right, but not the obligation, to purchase our 400 shares at $22 per share (the “strike” price) anytime before December 15 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option would be paying us $0.83 per share (the “premium”) per option.
Because we’re collecting immediate income when we open the trade, we’re lowering our cost basis on the shares we’re buying.
That’s what makes this trade safer than simply purchasing shares of the underlying stock the “traditional” way.
With all of this in mind, there are two likely ways our High-Yield Trade of the Week would work out, and they both offer significantly higher income than what we’d collect if we relied on the stock’s dividends alone.
To be conservative, we don’t include any dividends in our calculations for either of the following scenarios. The annualized yields are generated from options premium and applicable capital gains alone. So any dividends collected are just “bonus” that will boost our overall annualized yields even further. Let’s take a closer look at each scenario…
Scenario #1: KR stays under $22 by December 15
If KR stays under $22 by December 15, our options contract would expire and we’d get to keep our 400 shares.
In the process, we’d receive $332 in premium ($0.83 x 400 shares).
That income would be collected instantly, when the trade opens.
Excluding commissions, if “Scenario 1″ plays out, we’d receive a 3.8% yield for selling the covered calls ($0.83 / $21.69) in 39 days. That works out to an 35.8% annualized yield.
Scenario #2: KR climbs over $22 by December 15
If KR climbs over $22 by December 15, our 400 shares will get sold (“called away”) at $22 per share.
In “Scenario 2” — like “Scenario 1” — we’d collect an instant $332 in premium ($0.83 x 400 shares) when the trade opens. We’d also generate $124 in capital gains ($0.31 x 400) when the trade closes because we’d be buying 400 shares at $21.69 and we’d be selling them at $22.
In this scenario, excluding any commissions, we’d be looking at a $456 profit.
From a percentage standpoint, this scenario would deliver an instant 3.8% yield for selling the covered calls ($0.83 / $21.69) and a 1.4% return from capital gains ($0.31/ $21.69).
At the end of the day, we’d be looking at a 5.3% total return in 39 days, which works out to a 49.2% annualized yield from KR.
Here’s how we’d make the trade…
We’d place a “Buy-Write” options order with a Net Debit price of as close to $20.86 ($21.69 – $0.83) as we can get — the lower the better. Options contracts work in 100-share blocks, so we’d have to buy at least 100 shares of Kroger (KR) for this trade. For every 100 shares we’d buy, we’d “Sell to Open” one options contract using a limit order. I just made this trade with four options contracts, so the numbers in this article reflect that. Accounting for the $332 in premium we’d collect for selling four contracts, that would require a minimum investment of $8,344.
Good Trading!
Greg Patrick
P.S. We’d only make this trade if: 1) we wanted to own the underlying stock anyways 2) we believed it was trading at a reasonable price 3) we were comfortable owning it for the long-haul in case the price drops significantly below our cost basis by expiration and 4) we were comfortable letting it go if shares get called away. To be mindful of position sizing, except in rare cases, the value of this trade wouldn’t exceed 5% of our total portfolio value. In addition, to minimize taxes and tax paperwork, we would most likely make this trade in a retirement account, such as an IRA or 401(k).
P.P.S. How safe is KR’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 93. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, KR’s dividend appears very safe, with a cut extremely unlikely. Learn more about Dividend Safety Scores here.
Please note: We’re not registered financial advisors and these aren’t specific recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we do our research, to the time we publish our article, to the time you’re alerted about it. So please don’t attempt to make this trade yourself without first doing your own due diligence and research.